Q3 2024 Associated Banc-Corp Earnings Call
The
Music
The End.
Speaker Change: Good afternoon everyone and welcome to Associated Bank Corpse 3rd Quarter 2024 earnings conference call.
Paul: My name is Paul and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer section at the end of this conference. Copy of the slides that will be referenced during today's call are available on the company's website at Investor.associatedbank.com
Speaker Change: Heather Minder, this Comfort Call, is being recorded.
Speaker Change: As outlined on slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements.
Speaker Change: Associated Actual Results could differ materially from the results anticipated or projected in any such forward-looking statements.
Speaker Change: Additional detailed information concerning the important factors that could cause associated actual results that differ materially from the information discussed today is readily available on the SEC website in the Respected Section of Associated's Most Reasoned Form 10K and subsequent SEC Shilons.
Speaker Change: These factors are incorporated here in by reference.
Speaker Change: A reconciliation of the non-gap financial measures to the gap financial measures mentioned in this conference call, please refer to pages 28 through 30 of the side presentation into pages 10 and 11 of the press released financial tables. Following today's presentation, instructions will be given for the Q&A session.
Speaker Change: At this time, I would like to turn the conference over to Andy Harmony, President and CEO for opening remarks. Please go ahead, sir.
Speaker Change: We'll get afternoon everyone and welcome to our third quarter earnings call. I'm Andy Harmaning and I'm joined once again by our CFO Derek Meyer and our Chief Credit Officer Patty Hearn.
Speaker Change: All start off by sharing some highlights from the quarter, and then from there, Derek will provide a few updates on our margin, income statement and capital trends, and perhaps we'll provide an update on credit.
Speaker Change: and a macro level that third quarter did bring a variety of data points indicating these slopes, slowing the US economy.
Speaker Change: But closer to home, we continue to see signs of resiliency and stability in our midwestern footprint. Unemployment in Wisconsin is at 2.9%. And many other midwestern states are also below the National average.
Speaker Change: Our prime and super prime consumer base has remained strong and our commercial clients have largely been able to manage their way through elevated rates, supply chain issues and inflation.
Speaker Change: We serve stable markets and in tandem with our conservative approach to credit, that's the ability is translated to strong asset quality trends again in this quarter.
Speaker Change: Importantly, he was also able to stay squarely focused on the execution of our strategic plan. And now we're seeing several tailwinds start to emerge across our company.
Speaker Change: On the consumer side, we now have a value proposition that stacks up well against just about any one in the industry, whether that's a commercial bank or a fintech.
Speaker Change: Over the past few years, we've completely transformed the customer experience by building out a modernized digital banking platform to make it easier for our customers to manage their money when and where they want.
Speaker Change: We've deployed customer-favorite product enhancements like Graystone, early pay credit monitoring, and we've launched a new massive flow of program to deepen relationships with a strategically important customer segment.
Speaker Change: We're going to continue to make enhancements, but we already have what we need to grow in our markets on the consumer side of the business and we are growing.
Speaker Change: We believe we're right on track and importantly, sit or our customers.
Speaker Change: In 2024, we've seen the highest net promoter and mobile banking satisfaction scores on record. We're also growing our customer base for the first time in years and attracting a higher per household deposit balances.
Speaker Change: with these new customers.
Speaker Change: On the commercial side, we continue to build momentum by adding strong producers and key growth markets.
Speaker Change: Following the additional several experience leaders such as Phil Trier, Neil Regulman and Michael Levin's over the past year, we're progressing on our overall plan to add 26 commercial and business RMs by early 2025.
Speaker Change: Earlier this week, we announced a launch of a new specialty deposit and payment solutions vertical focused on deposit centric industries such as Title and Esgro, A2A property management, and FinTechs.
Speaker Change: This vertical would be left by Rick Braun in industry expert who joins us from U.S. Bank where he spent the past 18 years of his career.
Speaker Change: Howard Organic Phase 2 initiatives are already impacting our financial results. Here's the third quarter we saw encouraging signs of progress, with over $600 million in court customer growth.
Speaker Change: Court Customer to Positive Growth, and nearly 300 million in CNI long growth in solid core earnings growth.
Speaker Change: We have positioned ourselves to outperform in both an improving macroeconomic scenario or in a low-growth market condition.
Speaker Change: With that said, I'd like to walk through some of the additional financial highlights from the third quarter beginning on Sliding 2.
Speaker Change: On a gap basis, we posted the LUTODEPS of 56 cents per share.
Speaker Change: Court customer deposits grew by over 2% from the prior quarter, but they also grew by 2% relative to the same period last year. Demonstrating the incremental impact of our initiatives above and beyond the seasonal inflows we typically see this time of year.
Speaker Change: This Court of Ponsi Growth is also enabled us to work down our wholesale funding balances by 2% or in the quarter.
Speaker Change: On the other side of the balance sheet, we've continued to make progress on our efforts to enhance our profitability profile by diversifying our loan portfolio. Total loans grew by over 1% led by emergency and I growth and steady production in our auto book.
Speaker Change: and shifting to the income statement, our balance sheet growth combined with an expansion of asset yield and a slight decrease in liability costs, through a three-based point increase in our net interest margin, and a $6 million increase in NII during the quarter. Our revenues were also boosted by a $2 million increase in non-interesting income.
Speaker Change: Led by continued growth and wealth management fees.
Speaker Change: Total non-interest expense increased $211 million for the quarter. But our efficiency ratio to crease slightly has we continued to diligently manage our expense level, while less acute in our growth strategy throughout the year.
Speaker Change: On the Capitol front, the stability and expansion of our core profit ability profile has enabled us to create capital throughout the year. Hearing Q3, our CET1 finished at 9.72%, a 33 basis point increase from the end of 2023.
Speaker Change: Underpinning our entire strategy is our foundational discipline on managing credit risk and we begin saw solid results in Q3. During the quarter our nonacruals and that charge-off decreased meaningfully. We added another 21 million in provision and increased our ACLL by a basis point.
Speaker Change: As always, we remain committed to staying ahead of the curve by taking a disciplined, consistent approach to long-resveratings so we can better understand credit risk in our portfolio by both segment and geography.
Speaker Change: Real continued a minor asset quality closely.
Speaker Change: Schifting to slide three. We've talked that length about the foundational outcomes from phase one of our strategic plan and here in 24 we've worked hard to build on the momentum by steadily executing our phase two initiatives.
Speaker Change: and we sit here in October, much of the consumer product work has already been completed.
Speaker Change: Specifically, we've continued to roll out quarterly product and service updates that enhance the customer consumer customer experience and position us to attract deep and and retain customer relationships.
Speaker Change: You can see that in the front line where we've addressed pain points that improve the branch and call in experience. And you can see it in the product set, we've added tools to make it easier for customers to manage their money regardless of where they are.
Speaker Change: We still can make regular enhancement going forward, but the fact is we now have a value proposition that enables us to compete with just about anyone in the marketplace. Although that would not be the community banks down the street, the large banks and the urban centers, or even FinTechs.
Speaker Change: We also remain on track for growth on the commercial side of the company where we've continued to make progress on our plans to hire 26 commercial and business RMS to support an amplifier growth strategy.
Speaker Change: Today we've added a Nat of 16 RMS in September 30 of last year and we expect to hit our target of 26 by early next year.
Speaker Change: The impact of our hires thus far is beginning to emerge in our financial results and we expect this impact to grow throughout 2025 as the new RMS across our footprints settle in and build the respective pipelines.
Speaker Change: Take into account our contract with Phase 2 and we continue to expect cumulative incremental commercial loan growth of $750 million. A cumulative incremental deposit balance is up $2.5 billion and annual household growth of 3% by the end of 2025.
Speaker Change: We added slide four to give a more visual snapshot of where we've been, where we are, and where we're going as a company.
Speaker Change: and the other three metrics that drive our story. First, our customers are more satisfied. After being named number one for customer satisfaction by Ditt J.D. Powerback in April, we're now seeing the highest net promoter and mobile banking satisfaction scores. We've ever seen on record at Associated Bank.
Speaker Change: Secondly, we've taken a year's long negative household trend and flipped it to positive in 2024. This sets us up to deep in relationships and drive to positive growth over time.
Speaker Change: and finally, we're continuing to add top count to our commercial team.
Speaker Change: As we've said in the past, it sets us up to drive long roads, but it also positions us to deepen full banking relationships with deposits and other services like TM.
Speaker Change: We feel good about our trajectory and look forward to sharing more specifics around our 2025 outlook in January. With that, I'd like to highlight a few balance sheet trends for the third quarter beginning on slide 5 with the lone portfolio.
Speaker Change: Total period in loans grew by 73 million during the quarter and this growth was once again led by our CNI and auto verticals. We look, we look to continue remixing our balance sheet while retaining our conservative approach to credit.
Speaker Change: The partial offset to this growth we saw, the CRE construction loans decreased by $141 million during the quarter, as an elevated payoff trend extended into Q3.
Speaker Change: We also saw our Resi Mortage Book decreased slightly from the prior quarter as we continue to diversify the consumer side of our loan portfolio.
Speaker Change: Across our broader portfolio, we've continued to seek selective growth that emphasizes full banking relationships.
Speaker Change: Pauline Cretiprofiles and diversification to deliver improved returns. With this in mind, we continue to expect total long growth to land at the lower end of our original range of 46% in 2024.
Speaker Change: Moving to slide six, we mentioned back in July we expected the deposit growth to ramp up in the second half of 2024 and hearing few three that trend has played out just as expected.
Speaker Change: During the quarter we added over $600 million of core customer deposits. A 2% increase relative to Q2. While the primary driver of this growth was customer CDs, we kept it short. Fondaling the vast majority of that production through our 7-month CD.
Speaker Change: and importantly, most of our CD holders are already customers.
Speaker Change: 77% of active CD holders had a checking account with us in September. This percentage is risen significantly from prior years thanks to our relationship deepening initiatives such as Massive Fluent.
Speaker Change: The leadership deepening efforts are also visible through a growth in other deposit categories, such as DDA and Interest-Sparing Checking during the quarter.
Speaker Change: The inflow of core customer deposits during the quarter enabled us to work down our wholesale funding by 2%. With the primary driver being a decreased FHLB advances.
Speaker Change: We continue to expect core customer deposit growth to finish 2024 at the lower end of our original 3 to 5% growth range.
Speaker Change: and we remain confident in our ability to attract and deepen quality customer deposit relationships over time. With that, I'll pass to Derek to walk through the income statement and capital trends.
Derek Meyer: Thanks Andy, I'll start by discussing our asset when I do the yield trends on Spide 7.
Derek Meyer: Despite the 50 basis point rate cut at the tail end of the quarter, we saw F-8 yields inch higher in all major loan categories, including CRE, C&I, Otto and Rezi here in Q3.
Derek Meyer: Long to you, everybody. These trends are overall earning asset yield increased by three basis points during the quarter to 5.68%.
Derek Meyer: On the liability side, Interest Baring Deposit Costs ticked up by three basis points, but growth in deposit enabled us to decrease reliance on higher costs wholesale funding during the quarter. As such, our total cost of Interest Baring Liability is decreased to 3.59%.
Derek Meyer: Moving to slide eight, to turn that just described net it out to a three-bases point expansion in our quarterly net interest margin, landing us at 2.78% for the quarter.
Derek Meyer: Our NII came in at 263 billion for the quarter and for a presented at $6 million increase from part of quarter and at $8 million increase from the same period of year ago.
Derek Meyer: Based on our latest expectations for Balanchee Growth, deposit bait is in Fed Action, we now expect to drive net interest income growth between 0 and 1% in 2024.
Derek Meyer: On slide 9, we provide some additional color on the proactive steps we've taken at damp in our SS sensitivity and prepare for falling rate environment.
Derek Meyer: This process started in late 2021 when we began adding fixed-rate prime and super-prime auto-long store books. As of September 30th, the portfolio has grown to 2.7 billion.
Derek Meyer: While we've been clear all along that we don't intend to become known as the auto bank, these balances come at an attractive yield with less pre-payment risk or extension risk within mortgages.
Derek Meyer: In addition, we began layering in the portfolio of received fixed swaps to our books in 2022 to protect against downside rate risk. As of the September 30th, we maintain an optional balance of approximately 2.8 billion.
Derek Meyer: And finally, we've been thoughtful about our funding mix, emphasizing shorter term durations for contractual funding sources such as CDs and wholesale funding. As of Q3, we had over 10 billion in obligation set to mature in one year or less, which is about 87% of the total.
Derek Meyer: Take it together, these actions have put our balance sheet in a much more neutral position with a down 100 ramps scenario representing about a 1% impact or an II as of Q3 which is reduced from the 3.4% impact we are modeling in Q4 of 2022.
Derek Meyer: are going to maintain this modestly-asset sensitive position going forward.
Derek Meyer: She has been a slide 10, we've continued to manage our security's book within our 18-20% target range. With the benefit of arriving rates, combining the security's view position, we completed late last year, the average yield of our security's book is 50 basis points higher than the same period of year ago.
Derek Meyer: On a dollar basis, both our cash investments security positions increased slightly as compared to Q2 and these combined positions now represent 22% of total assets. Over the remainder of 2024, we continue to target investments to total assets in between 18 to 20%.
Derek Meyer: On fly 11 we provide an update on non-interesting come through Q3. Total non-interesting come came in at 67 million during the quarter which represents a 3% increase from Q2. On a unit-eight basis, non-interesting come continues to track roughly 3 million higher than in 2023.
Derek Meyer: Here in the third quarter, Grunt Transit was primarily driven by wealth management fees, which were up to million compared to two in service charges, which were from million over the same period. This goes as partially offset by smaller decreases in bowling, mortgage banking and capital markets.
Derek Meyer: We continue to see what encouraged by the durability of our non-interesting come in a challenge environment. And as in that such, we continue to expect four-year non-interesting come to finish in a range of negative 1 to 1% growth as compared to our adjusted 2023 base of 264 million.
Derek Meyer: Moving to 512, we continue to make ongoing investments to support our group initiatives, but maintaining our thoughtful discipline approach to where we invest those dollars continues to be a foundational focus.
Derek Meyer: In the third quarter, total non-existence of 211 million was up 5 million compared to the prior quarter, driven primarily by increases in illegal professional and FDSE assessment costs.
Speaker Change: The Spite D. Dollar Uptick and Expenses are just as efficient as you raise your actually decreased during the quarter to 60.4%. And are not just expense to average access to ratios as remaining line of far quarters at 1.93%.
Speaker Change: These metrics are a reflection of our commitment to keeping expenses in check while investing in our organic growth strategy.
Speaker Change: With this in mind, we've lowered our full-year expense outlook. We now expect total non-insure expense growth of between one and two percent in 2024. Off of our adjusted 2023 base of 783 million.
Speaker Change: As a reminder, this album includes the $31 million FGIC Special Assessment Expense booked in 2023, and an additional 4 million of net FGIC Special Assessment Expense booked in the first 3 quarters of 2024.
Speaker Change: On slide 13, we once again saw key capital ratios increase across the board here in Q3.
Speaker Change: We saw a 32-bases point net increase in our TCE ratio during the quarter, finishing at 7.50%. This net increase was driven by AOCI recovery and improved profitability, partially offset by asset growth in the denominator.
Speaker Change: AOCI Recovery represented about 27 basis points of benefit.
Speaker Change: After following the 9.39% as a result of our balance sheet, we structured repositioning in Q4 last year. Our CT1 ratio is deadly climb throughout 2024 and currently sits at 9.72% as of Q3. This is now the highest CT1 ratio we've posted since Q1 of 2022.
Speaker Change: TCE and CET1, both for me, while within our 2024 target ranges as of Q3.
Speaker Change: Give me current marketing conditions. We continue to expect TCE to remain in a range of 675-775 percent in 2024. We also expect CET to remain in a range of 9-10 percent over the same time frame.
Speaker Change: on now handed over to an Archief Credit Officer Pat Ahern to provide an update on credit quality.
Pat Ahern: Thanks, Derek. I'd like to start our credit portion with an allowance update on slide 14.
Pat Ahern: We utilize the Moody's August 2024 baseline forecast for our Cecil Forward-looking assumptions.
Pat Ahern: The Moody Space Line forecast remains consistent for the resilient economy despite the high interest rate environment. The baseline forecast contains no additional rate hikes slower but positive GDP growth rates, a cooling labor market and continued deceleration of inflation.
Pat Ahern: Our ACLL increased by another $8 million in Q3 to finish the quarter at $398 million. With an increase in COE partially offset by a decrease in commercial and business lending.
Pat Ahern: The uptick in C.A.E. largely stemmed from some migration into criticized loans during 23. We do not feel that this increase is an indication of a significant shift in credit stress, but rather it is a reflection of our adherence to risk-rating definition guidance, acknowledging shifts in credit profiles.
Pat Ahern: The Bank does not view these credits representing risk of loss at this time as reflected in our stable ACL.
Pat Ahern: All together, our reserves to the Lone Ratio increased by one basis point from the prior quarter and seven basis points from the same period of year ago to 1.33%.
Pat Ahern: Moving to slide 15, we maintain a high degree of confidence in the quality of our loan portfolio with continuous solid performance in core credit quality trends.
Pat Ahern: Credit metric changes are reflected of the continued theme of normalization within the portfolio.
Pat Ahern: At the front of the pipeline, total bankwide delinquencies landed at $56 million during the third quarter. After a downtake last quarter, two, three is in line with recent trends in historical averages.
Pat Ahern: Further down the line, total criticizing classifying loans increased from the prayer quarter. As noted earlier, the majority of this increase was driven by a migration within CRE loans.
Pat Ahern: Again, we do not feel that this increase is an indication of a significant shift in the corrupt profile of the portfolio, but rather it is a reflection of our here-and-starris-grating definition guidance, which acknowledges shifts in specific credits, but does not represent risk of loss at this time.
Pat Ahern: We continue our ongoing portfolio of deep dives and don't see a systemic shift in the CREAP portfolio. In fact, we see near-term resolution in many of the noted downgrades.
Pat Ahern: With the non-acduo bucket specifically, we saw balance, balance is decreased for the second consecutive quarter to $128 million. We continue to see a steady pace of resolution within these stress credits.
Pat Ahern: Finally, we booked $13 million in that charge after in the quarter and $21 million in provision, both of which represented the lowest numbers we've seen in the past several quarters. Our net charge-off ratio decreased by 11 basis points to 0.18%.
Pat Ahern: Taking together our credit metrics continue to give us confidence that what we've seen today is a handful of credits migrating through the rating system and not necessarily assign a broader issues coming down the road in future quarters.
Pat Ahern: Overall, outside of these specific situations, we remain comfortable in the normalized level of activity we've seen across the bank.
Pat Ahern: Going forward, we remain diligent and monitoring credit stressors in the macro economy to ensure current underwriting reflects angle and inflation pressures and labor costs to name just a few economic concerns.
Pat Ahern: In addition, we continue to maintain specific attention to the effect of elevated interest rates on the portfolio, including ongoing interest rates sensitivity analysis, bankwide.
Pat Ahern: We expect any future provision adjustments will continue to reflect changes to risk grades, economic conditions, low-enviance and other indications of credit quality.
Pat Ahern: Finally, we've provided a refresh of KCRE metrics in slide 16
Pat Ahern: In building our CRE portfolio we folks have partnering with well-known developers and built in portfolio predominantly in stable Midwest markets.
Pat Ahern: 2-thirds of our CRE portfolio is based in the Midwest, with an emphasis on multifamily and industrial properties.
Pat Ahern: We do not have any exposure to rent control, New York City real estate market.
Pat Ahern: Office loans now represent just 3.1% of our total loans as a bank and within that portfolio, we are weighted towards class A properties in non-urban environments.
Pat Ahern: We continue to take a proactive approach to see your office credits.
Pat Ahern: with the majority of those maturing for the remainder of 2024 and in their 2025 already having strategies in place.
Pat Ahern: Whether that be refinance, sale, or qualifying for extensions at prevailing underwriting standards.
Pat Ahern: While we feel well positioned given our business minor approach in the markets we operate in, we will continue to monitor this and all of our portfolios closely.
Pat Ahern: with that and will now pass it back to Andy for closing remarks. Thanks, Patrick. I'll wrap up by reiterating a couple key points from our presentation on slide 17.
Andy: Starting with the balance sheet, we've continued to seek selective long growth that emphasizes full banking relationships, quality credit profiles and diversification to deliver improved returns.
Andy: But this in mind we continue to expect total long growth.
Andy: to land at the lower end of our original range of 46% in 2024.
Andy: Your please, with the work that's been done across the bank to attract deep and retain customer relationships. And with the resulting momentum we've seen in foundational areas such as customer satisfaction and household growth.
Andy: Remain confident in our ability to deliver a court customer deposit growth. And we continue to expect our court customer deposit growth that finished 2024 at the lower end of our original 3 to 5% growth range.
Andy: On the income statement, we would just our most recent forecast for balance sheet growth, deposit bait is in rate environment. Taking these factors into account, we now expect net interest income growth of between zero and one percent for 2024.
Andy: We continue to feel encouraged by the durability of our non-interesting come in a challenged environment and continue to expect non-interesting come growth of negative 1% to positive 1% and 24 relative to our adjusted 2023 base.
Andy: and finally, our discipline approach to expenses remains a foundational focus for our company.
Andy: With this in mind, we've lowered our non-interest expense outlook to growth of 1 to 2% and 2024 after excluding the impact of FDIC's special assessment.
Andy: But that's over the other questions.
Speaker Change: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation term on the K-Eline is in the question, K-Eline.
Speaker Change: You may press star to if you'd like to remove your questions from the queue.
Speaker Change: Thank you. Our first question is from Daniel Tumayo with Raymond James. Please proceed with your question.
Daniel Tumayo: Hi, thank you. Good afternoon everybody.
Daniel Tumayo: Maybe first just on the margin as we think about how we might go forward. Just you have a table on slide nine that shows the funding majorities. Just curious kind of some of the rate pickup opportunities you think on that, especially on the one year.
Daniel Tumayo: was finding opportunities that you show their what that might look like.
Speaker Change: Yeah, so I'll say couple of things.
Speaker Change: and a little feedback. Page 9, we put out their own purpose. I mean, we wanted to show our contractual funding obligations. Really have been contained to one year or less, and I think that jumps out pretty clearly.
Speaker Change: When you think about the one year out, we feel like we have a lot of ability to work with the rate increase that is slow and steady. I would say, anybody would get in trouble, or be pressured more on margin would be if you see a big jump.
Speaker Change: Quickly, and then you see an inverted rape curve.
Speaker Change: We're not believing that those two things will happen and so with the fact we've been able to remain short and known the CD side, it doesn't even pull up the fact that we have $3.6 billion in customer CDs that are essentially seven months in duration.
Speaker Change: When those are renewing, we're getting 90% plus retention on those and we're picking up 100 basis points plus so far. So we feel like we can manage the downward interest rate risk.
Speaker Change: Um...
Speaker Change: There are a lot of factors that come into that during the year we haven't given guidance for next year.
Speaker Change: But we set ourselves up in a way to be ready for that. I would say the other thing that Derek's done a very nice job of for us is...
Speaker Change: Making us less assets sensitive, which is also on page 9. You can see back when I got here, we're very assets sensitive and we kind of rode that up and then...
Speaker Change: and Steadily over a couple of years, Derek and his team managed that down purposefully. Now we think we're very much in line with the industry and with an even playing field that comes down to execution of strategies.
Speaker Change: The End
Speaker Change: And then maybe one on the lender irings where you provided an update is to where you're used to stand now. Looks like there's...
Speaker Change: It looks like a pretty good jump here in the next quarter or two with the final leg of those hiring. But curious where you stand in terms of, where you think you stand in terms of kind of...
Speaker Change: Fully baked in opportunities from those lenders for a lending perspective and where that might end up.
Speaker Change: Yeah, so we gave, we put at the beginning what our forecast for increased performance would be, maybe I could share some stats that we, we haven't explicitly called out.
Speaker Change: But when we look up we're about 17% up in our arms over the past year.
Speaker Change: What's interesting is we track pipelines greater than 50% profitability to close and pipelines above 50%. Now, above 50% some people might say that's wishful thinking below that. If you have above 50% certainty, you're pretty likely going to close those deals.
Speaker Change: That pipeline from a year goes up 18%.
Speaker Change: So we already see the early, it's great to hire people. We don't make money by hiring people. We make money by having them get out there, get a full relationship, and book it.
Speaker Change: So right now the category that is the probability of clothing above 50% is growing at a rate very similar to what we're seeing in the hiring front.
Speaker Change: That's pretty impactful to us.
Speaker Change: We also have hired people that have nice associations, those expire.
Speaker Change: We had one expire in October, we have one expire in November. Our ability to track top talent. I'm as confident right now as I have been since I joined this company through in after years ago.
Speaker Change: So I feel quite confident we're going to be able to bring in talent over the next three to four months and get the entire team net.
Speaker Change: The net team at a position where we are up 26 RMs. It takes about six months for somebody to really hit their stride.
Speaker Change: So we expect the impact from the folks we've already hired throughout the year. We're sticking with what we believe we can get in upside because these folks are talented and they're bringing their pipelines up at a rate that is quite good.
Speaker Change: It's a long answer to a short question, but now we've gone to the second phase, which is we've gone from hiring people to seeing a pipeline that's has certainty in this past quarter we saw a little bit of growth. We expect that that will continue on even a modest growth marketplace through 2025.
Speaker Change: Terrific, appreciate all that color, I'll step back, thanks Andy.
Andy: Thank you.
Speaker Change: Thank you. Our next question is from Scott Seafers with Piper Sandler. Please proceed with your question.
Speaker Change: Thanks for taking the question. He was hoping you might be able to discuss the outlook for the complexity of loan growth in the sports corner. I think he at least touched on it or a portion of it with the comments about onboarding personnel from earlier this year. It looks like it needs to be just a touch stronger than he generated in the third quarter of the serious or that will come from. Maybe more broadly if you can send a moment on what your customers are saying about appetite to borrow when they get them off the sidelines, etc.
Speaker Change: Yeah, well you ask a lot in that one question I'm I'm ready to throw
Speaker Change: What I would say is every quarter that goes by, if you think about a ramp up of six months, we got another quarter for the folks that are here in the commercial team. So that piece of it gives me quite a bit of confidence.
Speaker Change: We've been able to bring auto loans in at a really nice yield and when we're bringing people in last month I believe Derek DeFICA was 796. I mean Derek and I are concerned that we won't be able to get finance. So...
Speaker Change: We're really pleased with the quality of that customer, but we're also steadily growing that portfolio going into the rest of the year. We won't accelerate that, but those have been the key drivers for us on the Commercial Real State side. It's healthy to get payoffs.
Speaker Change: When people have completed some of their construction projects.
Speaker Change: We're down in that category. I actually see that as a good thing for the bank and for the barber.
Speaker Change: However, that longer term rates stayed a little bit high so...
Speaker Change: We may not see the payoffs in the fourth quarter that we did in the third quarter. That's uncertain, but it looks like if those day a little high we get the yoke herb we are seeing now.
Speaker Change: The deck was also lead to a few pure payoffs.
Speaker Change: and then finally when you have...
Speaker Change: A situation where you bring in a lot of new people, you do have some people access. And so we look closely at the portfolio and say, with access, what credits are we willing to access?
Speaker Change: and so we had a few credits that we thought were okay if they acted it.
Speaker Change: and the second and third quarter. We feel pretty clean right now. And so we don't think that we would have the payoff volume that we had in the prior two quarters either. So you marry a seasoned commercial group with a steady auto book and a decrease in in in payoffs.
Speaker Change: and that's where we think we've stayed pretty steady in the range that we have. But now we've gone to the lower end of it on loans.
Speaker Change: Good morning, Dr. Perfect. Thank you. Maybe, Pat, could you? Would you mind spending your second kind of standing on your comments regarding the increase in criticized loans? It feels kind of like it because there was just a risk-wraining shift in there. Would that be sort of a one time step up or does that take a couple of quarters to work its way through how to sort of push it in poles in their work?
Pat Ahern: Well, as I noted, I think, you know, we've circled a handful of those credits that we think are kind of short-term. They could see upgrades in the next quarter or two.
Pat Ahern: So we're not overly concerned that there's going to be some continue migration there. These are kind of a lot of the things these are not portfolio wide. These are more select credits and it's kind of normal course of business stuff that we're seeing.
Pat Ahern: and I'll point out that in this year we can continue to focus on long-term customer relationships.
Pat Ahern: and these are sponsors we've worked with for many years. We remain very confident how those relationships are stepping up and working with us to address some of these issues and like I said they're more kind of normal course of business stuff and nothing, nothing systematic or a big shift within the portfolio.
Speaker Change: Gotcha. Alright sounds good. Thank you very much.
Speaker Change: Thank you, Scott
Speaker Change: Thank you. Our next question is from Jared Shaw with Barclays. Please proceed with your question.
Jared Shaw: Good evening, thanks.
Jared Shaw: Maybe just going back to the auto side, you know, the auto growth has been a little lower than I think.
Jared Shaw: What you had indicated earlier in the year, but you call out good yields and great credit metrics there. What's causing you to...
Jared Shaw: Keep that growth rate a little lower than the Navy Uida, you know that 250 range earlier is it, you know, just trying to build that capital ratio or what sort of the dynamic from keeping you from seeing better growth there.
Speaker Change: And then it's not that you think for the question, Jerry, it's not the capital ratio. This is a category we've said, we want to be prime and super prime and we want it to fit into the rest of our book and we don't want to be aggressive.
Speaker Change: We said we don't want to be the auto bank per se and we want to make sure that we're keeping our outstanding in a range.
Speaker Change: for us as we've seen a little bit slower growth. We don't want it to outpace the rest of the portfolio. However, the deals that we're putting on with a 796 spike out in a very nice yield is very good business.
Speaker Change: We don't want to dip down in fight gun, we don't want to dip down in credit risk on a balanced score card, we won't.
Speaker Change: and so when demand has gone down a little bit.
Speaker Change: We could expand our network of dealers we haven't aggressively done that to make up for it. We'd like the pace that we're running at, we'd like the dealers that we're dealing with. We'd like to study growth in the business. And frankly, we want our commercial business to ramp up.
Speaker Change: and that is the area focused for us right now where we're.
Speaker Change: We're trying to get a pivot in the overall portfolio. So we've seen some softening and the auto sales overall. We haven't felt that we need to press on that to put something put additional volume on the books.
Speaker Change: and the security supportfolio. What's the expectation on cash flow over the next year coming from securities and can you find a step with the rolloff field and roll on the old looking like.
Speaker Change: Yeah, so we have about 40 million in court and the roll is off, we're probably putting on 500 million. The differential and what's rolling in the options, what's going back on is not as large as it was, but it's still probably 25 to 50 basis points.
Speaker Change: We have a good portion of that still and that's how the maturity that's more mutiny and those don't really know if they're more long-term investment.
Speaker Change: Thanks for the next five or six quarters, you're going to get three or four basis points a quarter of pickup in the total book.
Speaker Change: Thanks for this. Finally for me, I guess. Looking at expenses and looking out into the 25, not guys in the 25, but just sort of the outlook with you pulling back the expense growth going to the end of the year, but still bringing on these new hires. How should we think about?
Speaker Change: The Church Actory may be of longer term investment in the business end and this positive operating leverage something we should be.
Speaker Change: Thinking is attainable as we go out over the next year or so.
Speaker Change: Let me take that one. So you said a few things in there and I will say we don't share guidance for 2025 until January but...
Speaker Change: A few things with regards to positive operating leverage because you know you started with the expenses but of course it's expense and revenue and and the revenue part of it is really impacted by rate and so when we think about the first piece of that we think we set ourselves up by staying sure
Speaker Change: and the positive. What we do know going into next year and I'm particularly happy with is that we have momentum in categories that we need momentum in order to drive revenue. And that is customer growth.
Speaker Change: That is deposit growth that's sustainable and when you have customer growth with really high satisfaction, that leads to sustainable deposit growth. So I feel really good about that heading into next year. We have a commercial book.
Speaker Change: On the deposit side that we right-size a couple of businesses were done right-size in that. So as we head into 2025, my expectation is to market out the form versus our peers going into that. And then look, we have spent a lot of energy getting...
Speaker Change: Really good leaders on the commercial side and good people attracted people. And we mixed that with a team that was really pretty solid that we already had at the bank with the new folks we're adding that are quality. I don't see anyone that has that combination of customer satisfaction, customer growth.
Speaker Change: Leading to the posit growth on consumer and then investment in additional 26 RMs on a base of 90.
Speaker Change: and so.
Speaker Change: I find those to be good lead indicators that we're set up.
Speaker Change: to outperform. Now...
Speaker Change: to get two positive operating leverage.
Speaker Change: We have to understand what happens in the rate cuts scenario and there's no one on this call that knows that.
Speaker Change: We know that rates are likely to be cut. We don't know what pace at what time and we don't know what the yield curve will do on that. And I say that, the impact of those, they're not just generic loan and deposit impacts. They get impacts stuff like the amortization of rezi loans that are at a lower rate, which we would love to see.
Speaker Change: So we're going to get a feel for that we think as we go through this spinal cordon will be set up in a better position to answer that
Speaker Change: Pons of operating leverage question, but Derek, you know that's on my mind. Obviously I could ran a lot of things that go into that. That's what our team's discussing, what we think the impact of break. That's probably the biggest.
Speaker Change: on known because we're tracking every other key indicator going into it. So we think we're relatively well set up.
Speaker Change: from a revenue expense standpoint. And I will tell you we've already, as we have in every single year, we've actually just wrapped up our expense management, tactics going into 20, 25. So we're ready on that piece down to the line of business at this point.
Speaker Change: Great, thanks for the color.
Speaker Change: Thank you.
Speaker Change: Thank you, our next question is from John Arsherm with RBC Capital Markets. Please for a second question. Hey, thanks. Good afternoon.
John Arsherm: John. Hey, one fall off on Jared's question. Derek on the security support folio size, the quickspect modest growth, like we've seen in the last few quarters, is that the right way to think about it.
Derek Meyer: That's right. Yeah.
Derek Meyer: The End
John Arsherm: I'm not interspiring to positive. We talked about that a little bit last quarter, I expect them to be a little bit higher but maybe just help us understand what's going on there and what kind of an outlook you have is that maybe trust.
John Arsherm: Yeah, I think, well, we saw a little bit of growth this quarter. We're closing in on probably the level that we thought we'd finished the year, maybe it's 100 to 200 million less than.
John Arsherm: We thought four quarters ago, but it's, it grew this quarter and we think it's stabilized at a nominal dollar amount. We think the rest of the book is going to continue to grow faster going into the next year. So as a, I think I said before, I think as a percent.
John Arsherm: The industry is going to see a smaller percent of non-interest bearing, but I don't see it as a risk to earnings like it was at the end of the year last year.
John Arsherm: And I would say comparatively, if you think about a bank that's growing at 0% on their customer base, checking household customer base for one that's growing at 2% to 3%, which is what we expect, and by the way, we haven't been able to enjoy that kind of growth in the past. We went from minus one and a half.
John Arsherm: to zero to what we expect, one and a half this year, and we're forecasting three next year. So that plays a positive role when you think about non-interest bearing accounts and balances.
Speaker Change: Thank you.
Speaker Change: And then just on the net interest income guide, the 0 to 1%, when you...
Speaker Change: Is it?
Speaker Change: It's safe to say that net interest income is likely at a bottom at this point.
Speaker Change: Thank you.
Speaker Change: Andrew Harmening, Andrew Harmening, Patrick Ahern
Speaker Change: Thank you.
Speaker Change: All right, one more if I can, Pat. I understand you answered the question earlier and criticized, but any thoughts on the provision from here? Is this just something that's going to match loan growth and charge-offs, or is there something telling you you guys need to continue to slowly build reserves?
Pat Ahern: I think we're pretty solid with where our reserves are right now, and I think, you know, we'll continue to watch any movements, but I think, you know, loan growth is obviously a factor, so we'll look at that, but we feel pretty good about the reserves right now.
Speaker Change: Alright, thanks guys, I appreciate it.
Speaker Change: Thank you, Joe.
Speaker Change: Thank you. Our next question is from Terry McEvoy with Stevens Inc. Please proceed with your question.
Terry Mcevoy: Hi, good afternoon. Thanks for taking my questions.
Terry Mcevoy: Maybe if we could start, how's your deposit pricing strategy on non-CD products? How's that changed following last month's Fed announcement and more rates to come? And I ask because I do think of associated as being more of an an offensive bank playing offense. And then how do you see the downrate deposit beta tracking going forward?
Speaker Change: Want to touch on that, Patrick? Yeah, so the...
Speaker Change: So I think what's been pleasing, and it might be because...
Speaker Change: of software loan growth during the quarter. As an industry, we've seen...
Speaker Change: At least initially, everybody dropped rates pretty aggressively, so that allowed us to do that.
Speaker Change: down to 4.5%. That seems to be similar to what I see other banks doing. Normally you see deposits lag quite a bit the first quarter after rates start dropping.
Speaker Change: Again, I see the industry moving pretty quick, which gives us room from that standpoint. If we think about going into next year, we think that the down basis is the same that we've shared before, which would be 51 to 56% on interest bearing.
Speaker Change: probably 45, 46% on total deposits.
Speaker Change: and that's looking at this you know before this first rate cut all the way through next December
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Perfect. And then a follow-up for Patty, how much should we read into the increase in the construction CRE reserve is up to 3.74 and was that connected at all to the migration into substandard loans that we've talked about a couple times?
Speaker Change: Yeah, in part it was due to that migration and then as always, you know, we're always looking at the CRE office book.
Speaker Change: to make sure we're you know that's still playing out in many markets so we want to make sure we've got enough cushion there just you know for the for the future but it's a it's a combination of both.
Speaker Change: Great. Let me go in quick with that. The 24 million of wealth management fees, is that a good run rate the market's been strong? Are there any one-time estate fees or something like that that can show up in any given quarter?
Speaker Change: Yeah, no look I'm really pleased with our wealth business. We're just starting to
Speaker Change: at the tip of the iceberg with that. The market's been good. That's been a driver of it. However.
Speaker Change: We're seeing referrals into that at a rate that we've not seen before, and so when you start to grow your customer base, when you create a mass affluence strategy that logically upstreams into private wealth, that's starting to happen.
Speaker Change: In addition to that, when you add 16 commercial RMs net, and then you get to 26,
Speaker Change: and so they're starting to refer into their...
Speaker Change: We've had good financial performance there.
Speaker Change: Frankly, in the future, we've had investments in our consumer bank, was step one. We've had investments in our commercial bank, that was step two. We're going to meet at Wealth here at some point in the future. But in the meantime, we're seeing a really nice trend going into that business.
Speaker Change: Thank you.
Speaker Change: Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from Timor Brazilar with Wells Fargo. Please proceed with your question.
Timor Brazilar: Hi, good afternoon. Starting with some of the changes on the funding side with the incremental time deposits coming on, the makeshift within the wholesale base, can you give us some sort of proxy as to where funding costs were at September 30 to help to help us kind of formulate the starting point for 4Q?
Speaker Change: I'm not sure I, you mean a spot funding cost estimate? Yeah. Beyond what you said, but no, I don't have that calculated.
Speaker Change: I would prefer you to put that in, which is in more order.
Speaker Change: Okay, there's just a lot of movement on the liability side, I thought maybe we can get a little bit more detail as to what that did to the pricing dynamic, maybe even just within the deposit base.
Speaker Change: How are the incremental CD's brought on in 3Q in order?
Speaker Change: Yeah, I mean you saw it. We changed pricing all throughout the quarter so you
Speaker Change: brokered market and all those we had four handles on it.
Speaker Change: in terms of production. So when you see our quarter over quarter CD book, it was flat. We grew it, but the rate was exactly the same, the two quarters put together.
Speaker Change: You'll see that on page 7 of the tables we sent out, and that was at 483 for both quarters on an ADB basis.
Speaker Change: Okay, thanks for that. And then, I guess just, you know, looking at the NII guide...
Speaker Change: that imply a step up in the fourth quarter. And I get that asset sensitivity has been reduced kind of when you extend it out over the next 12 months. But I'm just wondering, you know, where the confidence is in NII being able to grow in 4Q given maybe some of the near-term asset sensitivity pressures and the lag that might come on the liability side.
Speaker Change: are our strategies.
Speaker Change: And that, what I mean by that is the long growth.
Speaker Change: and the deposit growth.
Speaker Change: in improved profitability products, so CNI loans versus the Resi runoff.
Speaker Change: core customer deposits versus the wholesale funding. And then and then the overall growth of the balance sheet.
Speaker Change: is what gives us that confidence. I think if we weren't.
Speaker Change: taking market share and didn't have a plan to take market share vis-a-vis our C&I strategy, it would be harder for us to say that because you just wouldn't have enough balance sheet growth to support the NII outlook we're talking about.
Speaker Change: And then maybe another way of asking my first question, just any thoughts around interest-bearing beta as it sits in 4Q and then what the expectation is for beta on the way down, kind of magnitude and timeline?
Speaker Change: No, I don't have a quarterly beta for you. I think the best guidance would be how I answered the question before looking out between before the first rate cut, which would have been August, and where we expect our beta to finish in December of next year. I can add that that would have assumed 75 basis points of cuts yet this year, 100 basis points cuts of next year, and you get to a full deposit beta of 46%.
Speaker Change: Great. Thanks.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is for Chris McGrady with KVW. Please proceed with your question.
Chris McGrady: Thanks for the question. Derek, the loan data, I guess, can you help us on loan data, your assumptions on the down data for the asset side?
Derek Meyer: Yeah, so that gets, I think the easiest thing, because that's going to depend a lot on mix,
Derek Meyer: If you take our billion, we have a 2.85 billion in swaps, about a billion seven of that is against the loans. That would take that 66% that repriced within a year down to about 60%.
Derek Meyer: so that offers you some opportunity. And then if you think of the securities book on top of that in terms of earning assets, you expect those yields, I think I mentioned earlier in the call, to trickle up throughout the year.
Speaker Change: So that can take your overall asset beta below the deposit beta or total liability beta I talked about. You are right.
Speaker Change: The challenge is going to be, is that just how things end next year?
Speaker Change: And we think that that gives us the opportunity to expand margin higher at the end of next year than this year. But the path there will largely depend on the aggressiveness in the industry for deposit pricing. And that's why I think a little bit slower growth is probably better for us.
Speaker Change: from a deposit standpoint, because we don't think people will be as competitive on deposits. We still have the advantage of generating our own loan growth because we have the market share strategy by hiring more C&I relationship managers.
Speaker Change: Q4 seasonality on deposits. Anything to be aware of? And then also on the securities book, can you just remind us what's fixed floating in that portfolio? Thank you.
Speaker Change: Almost all of it's fixed, in terms of the securities. There's a little bit of FHLBs in there sometimes, so I treat that as largely all fixed.
Speaker Change: And then seasonality for us on deposits tends to be strong. If you look at the back half of last year, we were strong also. I expect that to repeat itself, particularly with the additional initiatives in place.
Speaker Change: Got it, thank you.
Speaker Change: Thank you, Chris.
Speaker Change: Thank you. There are no further questions at this time.
Speaker Change: Well, we really appreciate everyone's interest and the questions. We look forward to talking to you soon. If you have a question between now and next quarter, feel free to reach out. And we appreciate you following Associated Bank.